Criminal inquiry looks at banks over foreclosures

ZACHARY A. GOLDFARB, Washington Post

Published
5:30 am CDT, Wednesday, October 20, 2010

WASHINGTON — Federal investigators are exploring whether banks and other financial firms broke U.S. law when using fraudulent court documents to foreclose on people's homes, according to sources familiar with the effort.

The criminal investigation, still in its early days, is focused on whether companies misled federal housing agencies that now insure a large share of U.S. home loans or committed wire or mail fraud in filing false paperwork.

Although prosecutors across the country previously opened a patchwork of inquiries, a broader federal effort targeting companies that improperly evicted people from their homes is now taking shape. This comes at the same time that investors have begun to hold firms accountable for selling securities composed of mortgages that were improperly serviced.

As part of this reckoning, the Federal Reserve Bank of New York has joined with some of the country's largest investors in seeking to force Bank of America to buy back about $47 billion worth of troubled home loans packaged into bonds by Countrywide Financial, which is owned by the bank. Along with its partners, the New York Fed, which invested in some of these bonds during the rescue of the financial system, is raising the prospect that Bank of America could be sued unless losses are recouped.

In recent weeks, senior lawmakers have called for a federal probe into the use of flawed foreclosure documents and improper practices. But Obama administration officials offered few details about how they were proceeding.

In addition to the probe, the administration is seeking to send the message that it will hold banks accountable for illegal foreclosures, despite deflecting calls by some lawmakers and consumer advocates for a national moratorium on home seizures until cases can be reviewed.

Members of President Barack Obama's Financial Fraud Enforcement Task Force and other administration officials are scheduled meet Wednesday to discuss the foreclosure crisis. That is to be followed by a White House news briefing led by HUD Secretary Shaun Donovan.

"In more than 25 years dealing with major financial crisis issues, I have never seen this many agencies focused on a single issue," said Andrew Sandler, a defense lawyer who works on government investigations. "We are beginning to see signs of extensive governmental investigation that may also have criminal law implications."

Federal law enforcement officials usually have little authority to prosecute cases involving foreclosure law because they are largely in the states' domain. But according to sources familiar with the investigation, the federal government has both an interest and the grounds to prosecute the abuses because housing agencies under HUD, particularly the Federal Housing Administration and Ginnie Mae, play a major role in insuring U.S. home loans.

After reports surfaced in recent weeks that large banks filed court documents across the country that had not been properly prepared or reviewed, federal investigators want to determine whether similar paperwork was submitted to housing agencies to get insurance payouts, the source said.

In some cases, bank employees have acknowledged signing documents without reviewing them. If similar filings were made to housing agencies, this could violate federal law, which makes it a crime to lie about substantive matters to the federal government.

Investigators are also looking at whether the transfer of mortgage and foreclosure documents through the mail and computer networks would allow the federal government to make a legal case on charges of mail and wire fraud.

After what will probably be a lengthy investigation, the Justice Department could file a criminal or civil case if wrongdoing is ultimately found. This could be done in coordination with HUD's inspector general.

The investigation has yet to target a firm or person, sources said, but it could focus on banks, independent mortgage servicers, law firms and other companies involved in the foreclosure process.

In an interview Tuesday, Donovan said HUD has been conducting a review of the largest banks for the past four months after finding "significant differences in the level of . . . actions to try to keep homeowners in their homes to try to make sure they remain current." Under FHA policy, mortgage companies are required to take steps to ensure that struggling borrowers can avoid foreclosure.

The FHA expects to wrap up the review in a few weeks, but the results will not immediately become public because the banks will have a chance to respond.

At the same time, Donovan said, HUD is working with other regulators to ensure that no crimes are committed in foreclosure practices. "We are working closely with others in the administration, as well as independent regulators and law enforcement agencies . . . in insuring that no one loses their home as a result of a mistake or criminal behavior," he said.

Separately, the Securities and Exchange Commission has opened an informal inquiry into possible wrongdoing related to foreclosures. Attorneys knowledgeable about securities law said the SEC would look to see whether banks had properly disclosed to shareholders the risks and processes associated with the foreclosures.

"Whenever there are suggestions that there may have been any kinds of issues with respect to disclosure, misrepresentations or omissions, we are always looking at that kind of conduct," SEC Chairman Mary Schapiro said Tuesday.

Beyond investigations, federal agencies could take other action, including regulatory steps, to address misdeeds. The FHA and Ginnie Mae, which packages and sells FHA-backed mortgages, could require banks to change their practices and could impose financial penalties if firms violate the rules.

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, could file lawsuits if it finds that the giant mortgage companies were deceived by financial firms. Major banking regulators, which are reviewing how the banking industry carries out foreclosures, could order firms to change their practices.

After freezing foreclosures in many states amid reports of improper foreclosures, some major banks are preparing to submit new paperwork and resume the process of seizing homes.